My journey from bear to bull

I’ve been ultra-bearish on the economy since around 2010. I thought the measures undertaken by those in power were inappropriate and that a new crisis was imminent. Well, its been 8 years since the GFC and I have to admit I’ve been wrong. And my misjudgment cost me a lot of missed opportunities, while others were making money in financial assets, businesses, real estate, etc .. I was sitting on cash waiting for “blood on the street” and bargains that never came. And I was not alone, many smart people (much smarter than me) did the same.

In hindsight, I made 2 mistakes:

1. I did not fully grasp the mechanics of central banks money printing & Government in its entirety. Despite increasing GROSS debt levels, NET debt service costs are decreasing and Governments Debt/GDP ratios (net of central bank ownership) have not increased.

2. I surrounded myself by people/media thinking along the same bearish lines. Like most of us we read media and foster relationships based on affirmation, not information. We like people who think alike, we like blogs/media who tell us what we want to hear, not necessarily both sides of the coin. Lesson learned.

I’ve been a huge critic of central banks for kicking the can down the road and not addressing the fundamental flaws of the economy – excess levels of DEBT. But that didn’t bring me anywhere. Whilst I remain a critic, I softened my tone. Whether you agree or disagree with their money printing policies, they significantly brought down debt service costs for Governments, households and corporations. Our debt service levels are now at the lowest levels since 1980! (see graph below).

That means we all have more disposable income available for consuming and propelling the economy forward. Its true that debt levels have swallowed, so on one hand we only kicked the can down the road .. but on the other hand central banks now own a lot of Government debt, which essentially means Governments pay a lot less debt costs than ever before (despite >100% Debt/GDP ratios). Japan for example has 250% ratio, yet only pays net 1% of GDP to service this monstrous debt mountain. That’s because much of what it pays .. comes back to Government via central banks profits. The same goes for EU and US, though to a lesser extent.

That’s the path forward. Central banks will own more and more, rates will keep coming down, we’ll pay less and less to service our debts, hence we’ll all have more disposable income to spend and prop up the economy.

Additionally, money printing has also been a massive transfer of wealth from creditors (Germany, Netherlands… ) to debtors (Portugal, Spain ..) and from savers (old people) to debtors (young people). This wealth transfer was necessary and politically impossible to achieve otherwise. Central banks have achieved this silently and few people realise what’s happening.

Should a crisis occur in the meantime or markets lose trust in central banks, Governments still have an important card to play: Fiscal policy to spend on infrastructure, green energy projects, new technologies, etc. With rates so low and central banks owing most of the debt, why wouldn’t they run 5-10% annual deficits and have 200-300 debt/gdp ratios? I know this sounds insane but that’s the new world we live in. I can’t remain trapped in the old paradigm. Things changed and a new reality emerged. Had you told me 10 years ago this would occur .. I’d say its insane, but here we are and I can’t continue to ignore the new reality.

Another point is that despite globalisation and technology deflationary forces, it should be clear by now that central banks will not allow that to happen, so they’ll print as much money as necessary to get their inflation mandated targets. Sure, it could escalate quickly into high inflation but that’s another reason not to have cash and to be invested in real assets.

I’ve been expecting a crisis since 2010 and I thought of it as necessary to clean up the system, reduce debt levels worldwide, undertake structural reforms .. and essentially solve the unresolved 2008 GFC. Instead, we pulled the problem under de rug, did more of the same (more debt and money printing) and delayed the inevitable. But that’s how societies operate. I assumed we were collectively smarter and would do what needs to be done. But democracies don’t work like that, we always go for the path of least resistance until the problem is too large to ignore or until we hit the wall. Lesson learned.

Another point I missed is that this would be no ordinary crisis such are the debt levels we incurred. We’re way past the point of no return. If a crisis were to strike now, it would be global, banks would be insolvent and maybe our deposits gone. Or worse, it would lead to a war and no one would be here to tell. In short, the world economy is so fucked up that the establishment is willing to go to extraordinary lengths (negative rates, unlimited money printing) .. to keep this charade going.

A question remains: What’s the end game? Where is this leading to in the long run? Are central banks going to own everything (stock markets, bond market, real estate market…)? What would that entail exactly? We’d live in a very inflationary and socialistic world, but looking beyond 5-10 years out is a useless exercise, such is the pace of change of our society. There’s only the here and now and looking beyond the next 12-18 months doesn’t put food on the table. Despite all the gloom and doom, things look pretty rosy at the moment.

In summary:

Rates will remain low for decades to come: there’s just no way around that. If they go up, its game over for everyone, including the powers that be. They would not allow that.

The old view that Governments shouldn’t run debt/gdp ratios >90% no longer apply. Japan is illustrative of that. You can ultimately run a 1000% debt/gdp ratio if your rates are zero/negative. Even if rates move up slightly, in so far as central banks own most of the debt .. that’s not a problem.

Buy real assets (businesses, property, land, precious metals). Inflation is the only way to grow out of the debt problems we have.

Final notes:

Generally when all the bears throw in the towel .. its s clear red-flag and a sign that things are about to turn sour. I’m cognisant of that. Yet, “this time is different” 🙂

Black swan risks remain (Brexit, Deutsche Bank, Trump, Russia/NATO conflict) but one way or another .. they’ll find a solution because the risks of not doing so.. are too great.